Inflation on The Low: WPI Inflation shrinks to 1.77% (Five year Low)
Wholesale Price Index (WPI) for the month of October has shrunk to 1.77% against 2.38 % in September. It is the lowest since September, 2009 when WPI stood at 1.8%. Stable rupee and lower commodity price in the global market has led to the decline as per the Economist. The food price index, fuel and power price index contracted to 2.70% and 0.43% in the month of October. Wholesale Inflation takes into account the prices paid by the manufacturers on the goods imported and used as inputs. The main reason behind the WPI going down is lowering of the Crude prices in the International Market and the Dollar/Rupee stability seen over a period of time. The further depletion in prices of Gold is another plus for the economy as it will help in bring down the Current Account Deficit (CAD).
As I had hinted in my post last month that CPI will go down further in month of October and as expected we find that CPI has hit an all time low since it start of CPI computing in January,2012.
Consumer Price Index (CPI) stood at 5.52% in the month of October. With the expected Crude prices hitting an all time low in the International Market and prices of essential food prices remaining in check it can be expected that CPI may go down further for the month of November.
Industrial Output (IIP) also unexpectedly grew at 2.5% for year on year in September, it is the fastest in 3 months which augurs well for the manufacturing sectors as well.
RBI has a target of attaining CPI of 8% by for March, 2015 and seems to be on course.
RBI wants to ease Consumer Inflation to 6% by 2016.
Retail Inflation in vegetables also eased to 1.45% in October from 8.59% in September.
RBI will be under pressure from the Industrial Sector for rate cuts but I don’t think RBI will respond quickly to it as it will look to sustain the fall in Inflation rates. RBI will try and resist rate cut as of now in order to achieve the Inflation targets set by them. Moreover the chances are that if Food Inflation rises it will have an impact on overall inflationary rates next month.
We may see WPI shrinking further as Crude prices are trading at four year low which would help to keep the inflation down.
I strongly believe for growth of Industrial Growth (Index of Industrial Production) more than rate cuts, clear Industrial policies are required with more transparency in order to attract investments.